BY Malcolm Sawyer and David Spencer The UK government likes to blame the problem of unemployment on everything and everyone except its own policies. Two theses are promoted by the government. The first thesis is that unemployment is the result of exter …
BY Malcolm Sawyer and David Spencer
The UK government likes to blame the problem of unemployment on everything and everyone except its own policies. Two theses are promoted by the government. The first thesis is that unemployment is the result of external events – the global financial crisis and now the eurozone crisis – for which the present government cannot be blamed.
If anyone is to shoulder responsibility for the fragility of the UK economy, it is the previous Labour government that allegedly racked up a mountain of debt that has now to be tackled via austerity measures. The second thesis is that unemployment is the fault of the unemployed who are either unwilling or incapable of taking work that is available to them.
The first thesis fails to recognise that the government is hindering rather than assisting recovery via its own policy approach. The government is limiting fiscal policy at a time when the economy is in need of a demand boost. Its unwillingness to engage in any serious job creation programmes and to embrace any kind of coordinated industrial policy is preventing growth in industry. The timidity of the government towards finance even though it owns some large banks and its general reluctance to pursue major financial reform is also impeding a return to growth.
The Treasury works on the basis that the potential of the UK private sector is around 6 per cent less than anticipated and despite the UK economy coming out of recession output has yet to attain its pre-recession level. The prospects for the UK economy in 2012 look bleak indeed. Despite mounting evidence that policy needs to change and change radically, the government wishes to continue with its damaging and counterproductive cuts agenda. It can only be concluded that the government’s policies are ideologically driven and not based on any sound economic logic.
The second thesis that unemployment is the fault of the unemployed is as offensive as it is wrong. The reality is that jobs have dried up and no matter how willing and able the unemployed are to work, there are not enough jobs. When there are insufficient jobs, then when one person finds work it will be at the expense of someone else. Cutting benefits and stigmatising the unemployed is a recipe for lower wages and mass poverty. The only way out of unemployment is to raise the number of jobs on offer.
Unemployment is no picnic. It brings misery to those without work, scars the unemployed, and leads to lost output. Reducing unemployment is a win-win situation – those who would be without jobs gain work, and more is produced. Why do we have to endure unemployment? Unemployment is being chosen by those like George Osborne and Angela Merkel who are obsessed with eliminating budget deficits.
The price being paid by the Greek people as a result of that obsession is plain to see. The price of restrictive fiscal policy is also represented by the record levels of youth unemployment in countries such as the UK and Spain. Budget deficits should be used to reduce unemployment: the present policy is to increase unemployment to reduce budget deficits – a perversity if ever there was one.
We do not underestimate the resistance by our political masters and the financial markets to achieve full employment. We do not underestimate the technical difficulties of implementing policies which will bring about full employment. But the starting point would be to put the achievement of full employment at the centre of economic policy – and not to have the fetish of balanced budgets and austerity at the centre.
It requires not only running macroeconomic policy to stimulate demand, but also central and local government programmes directed at the creation of jobs in areas blighted by high unemployment, and a coordinated industrial policy to restore levels of investment which would not only create jobs now but also provide the capacity to employ more in the future.
When the private sector is not spending enough, the government needs to intervene. That is the basic lesson of Keynesian economics that was revived for a short time immediately after the financial crisis. In the last few years, however, there has been a reversion to outmoded pre-Keynesian thinking that governments need to cut their way of a crisis, and that the way to tackle unemployment is to create more unemployment. This thinking was wrong in the past and it remains wrong today.
Taking demand out of the economy at the present time simply adds to the length of the dole queue. It does not promise any revival in the fortunes of the economy but on the contrary risks a return to recession and economic misery for many millions of people. We can only account for the fetish for austerity on ideological and political grounds since the economic effects of austerity can be seen as essentially negative.
The stagnation of the economy and rise in unemployment can only be resolved by a boost in demand initiated and sustained by the government. The economy cannot magically restore itself to rude health but rather requires assistance and support from the government in the form of proactive fiscal policy coupled with a renewed industrial policy. Borrowing by government needs to be pursued to fill the spending gap left by the private sector. In 2009, the private sector invested £64 in capital equipment, construction etc for every £100 which was saved (by corporations and households).
That gap between what the private sector was spending on investment and what was being saved could only be filled through the government having a budget deficit. If the government had not borrowed, the private sector would not have been able to save. Budget deficits are the result of savings exceeding investment and of a lack of demand in the economy. When private demand revives, investment increases, and exports increase, then the budget deficit will fall as the economy revives and tax revenues flow into the Treasury. But private demand is unlikely to revive if governments practice austerity – indeed the reverse is likely to occur.
Budget deficits should be seen as Maurice Chevalier regarded old age – better than the alternative. In present circumstances, the alternative to budget deficits is austerity, higher unemployment, and lower incomes. Faced with this choice, we know which alternative we would choose.
Malcolm Sawyer and David Spencer
University of Leeds
This work is licensed under a Creative Commons Attribution-NonCommercial License.